For people reaching the age of retirement, estimating future cash flow is a priority.
Retirees should consider their income options and the resulting tax consequences to ensure they are maximizing the amount of after-tax cash available during their golden years.
There are a few retirement benefit programs controlled by the government, which may be available to supplement retirement income.
Old Age Security, or OAS, is a monthly taxable benefit available to people 65 and over who meet certain Canadian residency requirements.
Generally, a minimum residence period of 40 years after age 18 is required to be eligible to receive the full pension entitlement.
The maximum monthly OAS pension payable is about $524, however, if retirement income is greater than approximately $67,000 per year, a portion of the OAS payment must be repaid to the government.
This is often referred to as the OAS clawback.
If the OAS clawback is applied, an appropriate amount, as calculated by the government, will be deducted from monthly OAS pension payments.
The entire OAS pension is clawed back when annual retirement income reaches about $108,000.
Guaranteed Income Supplement or GIS is a monthly non-taxable benefit paid to low-income OAS recipients.
Eligibility is based on annual income and marital status.
To qualify, single, divorced, separated or widowed residents must have a net annual income, excluding OAS and GIS payments, of roughly $16,000 or less.
Married couples qualify if both spouses are receiving OAS benefits and their combined net income, excluding OAS and GIS payments, is less than $21,000.
Maximum monthly benefits payable through the GIS program are about $662 for single individuals and $437 for married individuals.
An allowance is also available to low-income individuals between the ages of 60 and 64 whose spouses are eligible to receive the OAS and GIS benefits.
To be eligible for this non-taxable monthly benefit, you must have lived in Canada for at least 10 years after the age of 18 and your family’s net income must be less than about $29,000.
The Canada Pension Plan or CPP is a monthly taxable retirement benefit paid to individuals who have made at least one contribution to the CPP program.
Those who qualify have the option of drawing retirement benefits as early as age 60 or as late as age 70.
CPP payments are based on contributions made to the CPP.
People who contribute more for a longer period of time are eligible for larger payments. The age at which an individual chooses to retire also affects the benefit amount.
The CPP benefit is designed to provide a monthly payment equal to about 25 percent of a person’s average monthly pensionable earnings during the years they contributed to the plan.
The contribution period ends when a person takes a retirement pension, reaches the age of 70, or dies, whichever comes first.
The retirement pension normally begins the month after the contributor’s 65th birthday.
Married or common-law individuals may apply to receive an equal share of the total retirement benefits earned by both individuals.
Both partners must be at least 60 years old and both must have applied for their respective benefits.
The benefit can be shared even if only one partner has contributed in the past. This split can be beneficial if one spouse’s total retirement income is lower than the other’s.
Potentially, the lower income spouse can claim the benefit on their tax return, and take advantage of a lower tax rate.
Contributors must apply in order to receive the OAS, GIS, allowance benefits, and CPP benefits.
Generally, individuals automatically renew the GIS and allowance by filing their income tax return.
All people considering retirement should seek advice from a financial professional to investigate income options, potential tax implications and other issues.
Colin Miller is a chartered accountant and senior manager in KPMG’s tax practice in Lethbridge. Contact: [email protected]
He would like to thank Lanna Wesley and Ebony Verbonac of KPMG for their assistance with writing this article.